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Is it Necessary to educate my child about managing Personal Finance?

Being a personal Financial Planner, I often face this type of question regularly. In all the cases, my answer is always positive. Yes, you should educate your child about the usage and importance of money from the very young age like age 5. It’s not so tough to teach them because you may find that at this age he wants to learn everything. He has queries related to money when he plays the games of restaurant management or grocery store.

Now, start with the importance of savings. Ask him what he wants to buy in his next birthday . Then Buy a piggy bank for him and give him a coin every day to keep it in his piggy bank. Tell him that this money will be used to buy his dream gift on his birthday. This small piggy bank concept will not only teach him the first lesson of Personal Finance i.e. savings but it will give him a concept on patience. He will understand that if we want to have something special, we have to wait till the correct time arrives, which is a big lesson for every field in life.
Now let me come to the discussion in a structured way, point by point.

In the later part of my discussion, I would like to divide this managing personal finance discussion by age category depending on the mental ability and education status of the kids .

Let me divide this into 4 broad heads: Age 4-6 years, 7-12 years, 13-18 years, 18+ years

For the kids aged between 4-6 years

At this age, the kids are very young and they have just started interacting with the outer world. All the things are very new to them and in a simple, everything attract them. You’ll find that whenever you’ll go for a shopping with a kid at this age, he wants to buy everything. This is the best time to introduce the concept of money. Some may find it too early but you should.

Start the concept of money step by step.

1.Let him know that he needs money to buy every item.

2. Then let him know that one can get money by doing good work only. You may simplify the concept with the game of barter system. You may give him a small work and can give him reward with the completion of the work. This reward should be a thing which he needs really.

3. The above game will also make him understand that he has to wait before he can buy something he wants .

4. Another important point he can learn at this age that distinction between the things he wants and he needs. It may be little bit tough to make him understand but starting of this point is very much essential at this age. For example, when he demands a similar toy that he already has, explain him that he does not need it and stick to your decision but, most importantly when he demands for a different but useful one, you should buy a small/low cost one and explain that you are buying it as he does not have it and he needs it. This will prepare them for making good spending decisions in the future.

For the kids aged between 7-12 years

At this age kids are young enough to understand what are money and the importance of it. They already know basic mathematics like counting, addition and subtractions. So, it’s time to teach him something new about personal Finance.

1. Give regular shopping trips with your kids:

Normally in every household, more than 30% of income goes into grocery expenses . One can save a lot by taking wise decision while buying grocery items.
So, grocery store is the first place where you can demonstrate your kids about how to plan economical meals for daily life, how to make unit-price comparison and how to avoid wastes while making effective use of the leftovers. Show them how to check for value, quality, expiry, and other important consumer concerns. Make him understand that Spending money can be fun and very productive when spending is well-planned.

2. Allow your kids to make spending decisions:

Encourage them to do research before spending. Whether good or poor decisions they take. But this technique will teach them to wait for the right time of buying and also decrease the tendency of buying interest on every items.

3.Start giving weekly allowance.

But give the allowance in an easy denomination. If you are giving $5 per week then give them 5 $1 note and encourage them to save at least $1 from their weekly allowance in their piggy bank.

4.Open a Minor saving account:

This is the right time of opening saving account in bank. Take your kid to the nearest bank and open a bank account of him. Encourage him to put his savings from piggy bank to real bank account in 2 times a year. Tell him the importance of savings and interest rates and ask him not to share any important financial information on internet, like bank account no, passwords, etc.

Kids aged between 13-18 years

Now your kids are in their teens. It’s a very important part of their life. They require good and proper guidance at this age.

1.Savings should be a part of life:

Ideally, as I’ve discussed savings should be encouraged from a very young age. But at this age, savings should become their second nature. Teens should be encouraged to keep aside at least 10% of all money they receive from the weekly allowance, part time jobs and special occasion money. Then this money should be transferred to their savings account on monthly basis.

2.Learn the value of budgeting:

It is the time to teach your child about the importance of budgeting. Allot him some house responsibility, like: – give him the responsibility of buying daily vegetables & fruits and give him some cash on weekly basis for that. Take regular transactions details from him. Watch how he is managing the task and give him required advises. You can also added a reward for him like if he is able to manage to save some money from the given amount after fulfilling the home needs then he will get 30% of the saved amount. This reward system will encourage him to make a proper budget before taking spending decisions.

3.Inform him how credit card works:

Normally a teenage does not own a credit card but it is always better to know how a credit card works. He should know that using a credit card is just like taking a short term loan at a high interest. If one is not able to pay the bill amount within due dates then a high amount of interest will be charged and as a result more amount will be spent . So, one should AVOID USING CREDIT CARDS to buy things which he can’t afford to pay for with cash.

4.Importance of credit scores:

Teens are used to on grade system . It is better to introduce about credit scores. This concept will help him to become a good manger in his personal finance in his later life.

For 18+ years Kids

Now your kid is adult and requires taking his own financial decisions but he still requires your proper guidance.

1.Choosing colleges and education loan:

It’s time for higher education and choosing good colleges/high schools. Make sure that your child should compare between the quality and costs of each college. He should take education loan (if required) by comparing the interest rates and other details.

2. Health & Life Insurance:

Now he needs a health & life insurance. Introducing of insurance at this age will protect his forthcoming family at lesser cost. Of course, he may require to modify the premium amount in future as per him family need.

3. Keep aside emergency Fund:

It is the time of introduction of emergency fund. Tell him to keep aside at least 3 months’ daily expenses in a different liquid fund for emergency basis.

4. Encourage him to make short term and long term goals of life:

Ask your kid what he wants to be in life and tell him put a date on every future wish on his life. In this way, his wish will become life. Like- he may want to go for an international tour in next 3 years or he may have a desire of buying a house within next 10 years, etc.
Make different fund for every financial goal. Being a student and part time worker, now his income may be very little but tell him to set aside every month for each fund even if the amount is $1 per month.

5.This is the last point but I think the most important one.

Introduce him to the country specific tax system, capital market and available investment vehicles.

While teaching your kids on managing personal finance, always remember one thing that highly qualified personnel can also be financially illiterate. A recent study has shown that people with less financial literacy, tends to accumulate less wealth and borrow more. But person with good and proper knowledge on personal finance likely to make early retirement plans and able to accumulate more wealth than others.
So, prepare your child for his/her future from the early stages of life.

Have a happy parenthood.

About Moonmoon Biswas

Moonmoon Biswas is an Equity research analyst . She has more than 10 years of experience in this field. She has proven track record in the field of Technical analysis and the Fundamental analysis.
From the educational background, She is an MBA-Finance with CFA (India). She has work experience in the leading broking houses in India and has also in hand experience in Australian Security Market.
She has her own equity research firm and currently also engaged in digital marketing.